New entity a great value adding option for investors: Birla

moneycontrol.com
04 May 2015

In a major consolidation exercise, Aditya Birla Group on Sunday merged its apparel businesses into a Rs 5,290 crore entity named Aditya Birla Fashion and Retail (ABFRL), which will be the largest pure-play fashion lifestyle company in the the country. In an interview to CNBC-TV18's Sajeet Manghat, Kumar Mangalam Birla, Chairman of Aditya Birla Group shares his outlook on the same.

Below is verbatim transcript of the interview:

Q: Give us an outline of why you chose to merge only two entities into fashion and retail firm instead of the entire four entities that you proposed to Sebi as part of your informal guidance?
A: When you do a transaction like this you look at different options and we have been working on it for a while. After looking at different options we believe that this is perhaps the most attractive value adding option for our investors which is why we have gone ahead with it in the current firm.Q: You have More which was part of Aditya Birla Retail and you have Jayashree, which has brands and textiles. The street was expecting that it could be a consolidated retail and fashion entity but you choose to become a fashion and retail entity instead. Is there a bigger game plan for fashion and retail entity within Aditya Birla Group?
A: Now fashion and retail all come under one roof and is also a separate listed entity. If you look at the track record, it has grown aggressively in the last four-five years and the idea would be that it will continue to do going forward. It has grown much higher than market average for that space and is poised to do that going forward as well. It has got the wherewithal to do that, it got competence, it has got great management team, global scale of supply chain, great network; more than 8,000 points of contacts with the customer. It is most ideally poised to grow at heavy rate going forward. It is also by far the largest player in the sector both in the listed and in the unlisted space. Q: Is it also because fashion and retail would be easily understandable for investors as well because Pantaloons is already in fashion and retail and so, getting decent valuation is one of the ideas and unlocking value for the shareholder another one?
A: I must underline that the transaction that we have announced today also has genesis in feedback that we been getting from our investors and it demonstrates that what our investors say to us is important to us. We listen to that carefully and where we can, we take it to fruition. This is a huge value, adding opportunity for our investors, who will continue to hold their existing shareholding in Nuvo but will also have direct access to the fashion and retail business through new entity. So I agree with you. It is a great value adding opportunity for our investors.

Q: What about Pantaloons’ part because that was highly illiquid in the market? You held more than 71 percent through AB Nuvo and Biyani held about 17 percent, so roughly 90 percent was held by the two promoters. What happens to Biyani’s stake and now that you have a lot of liquidity coming in Pantaloons, do you expect Pantaloons to get a much better valuation in the market?
A: Biyani’s stake will get diluted inline with what is happening with other shareholders of Pantaloons but he becomes part of much larger entity which is Aditya Birla Fashion & Retail Limited (ABFRL). As far as Pantaloons is concerned, it will cease to exist in its current firm. It will also house the current Madura Garments which is part of Nuvo as today and therefore, becomes much larger entity rechristened as ABFRL.

Q: From a group perspective, where do you see the retail business going from here?
A: As of now retail is not a very large part of the group. Going forward if you look at the kind of growth that the market is seeing in the sector, I think it will become more and more significant part of the group and has got a track record to substantiate that claim.

Q: When you look at the valuations of e-commerce companies, was that one of the considerations that you have great businesses, great brands but the valuations are much lower than some of the e-commerce companies that are just market place in their model? Was that one of the consideration how to unlock the value?
A: Unlocking value was a very large part of the total consideration and this has unlocked value for Nuvo shareholders. It is a win-win for them. I do not see any downside in this transaction for our investors and I am sure they have a lot to cheer about.Q: The growth estimates presented at the press conference suggested 40 percent growth rate for revenue as far as retail is concerned on a consolidated entity, is that sustainable going forward?
A: Forty percent has been the rate of growth in the last four or five years. I don’t want to make any forward looking statements but one can expect this entity to grow at much higher rates than the average for that sector.

Q: At Birla group, is this your endeavour to make your structure more lenient and easier to understand because you had a lot of cross holdings through AB Nuvo?
A: That is true, Nuvo has demonstrated that it has spun off or monetised business after they have reached certain stages and from Nuvo perspective now that this one more business is out. The number of businesses simplistically speaking Nuvo comes down therefore becomes easier to understand.Q: What will be Nuvo’s focus going forward once this business is out?
A: Nuvo will continue to invest in businesses that were left behind. Having said that, lion’s share of the new investments will be in financial services sector that today are housed under Nuvo. For example, our contemplating getting into housing finance, into insurance, we are currently major players in mutual funds industry, life insurance. Therefore, that business will continue to grow as it has in the past.

Q: Nuvo will become the financial face as far as Aditya Birla Group is concerned. Will you also look at payment banks and small banks?
A: They are looking at payments bank. In fact if I remember right then Nuvo and Idea have jointly applied for payments bank license.Q: Are you hopeful that it will come true because the committees are still going through all the application there?
A: It is difficult for me to comment but I would like to say they have all the credentials in place and there is no reason that we can think of for not getting a license.Q: I need to ask you about the cement restructuring as well. There is a lot of discussion in the market, you have denied it at many point of time when it comes to Century Textile , how would cement business demerge and merge with Ultratech? What is your view on it because at some point of time you will have to look at it?
A: I have very often said this in the past and I say it once more that there is nothing in the offing. There is no plan to restructure cement of Century and merge it into Ultratech as has been written about a lot by the press. It is pure speculation, nothing that is in the offing at all.Q: Also, from an economy point of view we met you around a year back and we are seeing that there is some optimism coming back in the economy. In the last one year have you seen a lot of work happening on the ground so that the cycle turns around?
A: This government is doing all the right things. It might take a little longer for the impact to show on the ground but given the fact that they had started off at a tough space to start with that is only fair and I have a very optimistic view about the future as far as India is concerned now.

Q: But isn’t it a little longer than what many in India Inc expected?
A: We have to learn to be patient. They inherited a not so great economy and the important thing is that they are pursuing their objectives very doggedly and the right objectives and I don’t see why the results shouldn’t show up.

Q: Do you think that policy framework is getting into place?
A: I think so. The policy framework would take some time maybe to fall in place fully but seems to be on the right track.Q: Two of the key sectors were coal and power. They have come out with policies on that and coal your companies have also bid. How has been the experience and how has been the process like?
A: The process was extremely transparent. We were bidding for two of our businesses, coal and aluminium and we were extremely happy at the way that process was conducted.

Q: In our previous interaction you spoke about the fact that you have put a lot of investment there but there was no coal. Is that feeling is now getting mitigated now that coal auctions are happening and that you are able to bid in a transparent manner?
A: If you take the example of Hindalco, it would now have about 40 percent of its requirement captively held after these auctions and that definitely is a buffer of safety.

Q: Finally, do you think that growth rates that are being mentioned by various agencies whether it is RBI or the CSO, we are talking about seven plus. Will we be able to achieve those in the next six to eight months and when do you see actually the tide turning around?
A: It would take another six to twelve months for the tide to turn in the manner that everyone is looking at it and achieving seven percent is something that is fairly doable.